The storm clouds are gathering – again!
Christopher Lee Christopher Lee T
he storm clouds are gathering again in the debt markets. Europe, Ireland and Greece are clearly on the slippery slope to levels of debt financing costs that are not sustainable alongside a growth economy. In short they can’t afford the price! Germany appears to be the only economy that is in true growth stemming from an export lead recovery. Even here there is a threat as the euro strengthens on the back of this success. There are clear concerns in the US about the American economy where the Federal Reserve continues to provide stimulus through QE.
Regardless of the headline numbers there are a number of sectors demonstrating weakness akin to a double dip, not least here in the UK in the housing sector. Couple this with concern across the globe about the lack of strength in the US economy and all financial centres are looking over their shoulders.
Despite this, markets have shown increased strength with new highs being visited in the equity markets regardless of any disappointing data which comes out. The only explanation appears to be simple weight of money combined with portfolios being underweight in certain sectors. The weight of money is being generated by the central banks as they pump money into the system. The downside to this policy is future inflation and as commented in previous articles inflation has to emerge somewhere and where in previous cycles it has emerged in property it now is creeping through elsewhere. One thing is certain, serious problems remain under the surface and as in Ireland
60 November/December 2010
and Greece they will crystallise in the months ahead.
Markets
Despite really mixed signals and some weak data coming out over the last month trends have held their line so to some extent prices appear to have divorced themselves from economic data suggesting that sentiment is sweeping all before it. In other words all news is good news, even if it is bad news!
Equities
Currencies Equities
Equities have reached their highest point since 2008 breaking and holding levels through 5,800. The trend is your friend and investors who joined the train back in September must be enjoying the ride! How sustainable all this is remains to be seen but the strength of the market cannot be denied and there will only be a meaningful downward correction if the current values are shown to be false over time. Reality is that the festive season is approaching fast and those consumers who are in work have cash in their pockets and they appear willing to spend it regardless of what 2011 will bring.
Currencies
Sterling has shown a weaker trend against the major currencies during the past month including the USD. This certainly reflects the structural difficulties the UK economy has
Business Money
and the related debt burden. The markets are tending to indicate that although the coalition appears to be grasping the nettle there remains scepticism with regards to whether they can deliver. Couple this with obvious concerns about where the growth is going to come from it is not difficult to imagine sterling being soft for some time. There are also concerns about future inflation and the ultimate need to raise interest rates possibly just as the economy is really picking up. None of this will provide strength to the currency. The USD has been in a steady decline for some six months now and there seems little likelihood of this trend being broken in the near term. There are huge concerns about US employment and the demise of their property market coupled with deep rooted doubts about the easing strategy with the Federal Reserve continuing to pump in liquidity as seemingly the only instrument available to them.
Commodities Brent crude oil
Brent crude oil
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